While the announcement to fix the minimum support prices (MSP) at 50 percent more than the cost of produce to secure farmers against any fall in farm prices in the Union Budget of 2018-19 has drawn significant media attention, somewhat lesser attention has been given to the question – why are farmers in a globalised economy unable to get right price for their produce? Indian farmers produced record harvests in 2017, and the government’s agricultural budget rose 111 percent between 2013 and 2017, yet prices received by farmers crashed, and unpaid agricultural loans rose by 20 percent between 2016 and 2017.

Ideally, farmers who are well-connected to the domestic and global markets should be able to get the best price for their produce. Every time there is a bumper crop, farmers suffer. In the year 2016-2017, there was a record food grain production of around 275 million tonnes, and fruits and vegetables production of around 300 million tones. Since then, the country witnessed farmers’ protests in several states which led the government to announce the MSP. The concept of MSP is not based on sound economic logic. To ensure efficiency, farmers need to cut costs and maximise productivity. A guaranteed 50 percent margin on costs may act as a disincentive to do so. Further, farmers are not one homogenous group. Large farmers with access to market will gain from the inflated MSP, but it will not help smaller famers to access markets unless barriers to such access are addressed. At the consumer end, the prices of food items are high. According to the Ministry of Statistics and Programme Implementation, the Consumer Price Index (CPI) increased by 5.21 percent in December 2017, compared to December 2016.

Moreover, annual retail food inflation rose by 4.96 percent in December 2017 from 4.35 percent in November 2017. The rise in MSP can further increase the rate of inflation. Therefore, it is important to investigate why farmers are not getting the right price for their produce while consumers are paying a high price.

Studies have shown gaps in logistics infrastructure which has adversely affected farmers’ connectivity to their markets and their ability to get the right price. According to the National Centre for Cold-chain Development (NCCD) (2015) report on “All India Cold-chain Infrastructure Capacity (Assessment of Status & Gap)”, there was a gap of 3.28 million tonnes in cold storage space (bulk and hub), and a gap of approximately 53,000 units of reefer vehicles. To combat this, until March 2017, the government had created a capacity of 0.37 million tonnes of cold storage and 552 units of reefer vehicles, which is still vastly below capacity. According to IMAP India (2017), there are connectivity issues due to slow transit time for the movement of cargo through road and shipping networks. A report by Deloitte and Confederation of Indian Industry (2017) pointed out that poor road infrastructure has led to poor last-mile delivery connectivity from roads and port terminals to warehouses and pack houses. There is also an acute shortage of skilled workers such as warehouse managers, and IT experts to manage day-to-day operations.

The Finance Minister is his Budget speech recognised the need for building both hard and soft infrastructure. Using MGNREGA and other schemes, the government plans to develop and upgrade marketing infrastructure in 22,000 Grameen Agricultural Markets (GrAMs). The government also proposed to expand the coverage of e-NAM (National Agriculture Market), the pan-India electronic trading portal launched by Ministry of Agriculture & Farmers’ Welfare, to 585 Agricultural Produce Market Committees (APMCs) by March 2018. The Budget proposed to create an Agri-Market Infrastructure Fund with a corpus of INR 2,000 crore for developing and upgrading agricultural marketing infrastructure in the 22,000 GrAMs and 585 APMCs. The Budget also proposed to create roads to enhance connectivity under Prime Minister Gram Sadak Yojana Phase III. To ensure longer shelf life for perishable commodities such as tomato, onion and potato, which are consumed throughout the year, the government proposed to launch an “Operation Greens” which is expected to promote Farmer Producers Organizations (FPOs), agri-logistics, processing facilities, and professional management. A fund of INR 500 crores has been allocated for the same. The government also proposed to extend a favourable taxation treatment to the FPOs for helping farmers regarding their need of inputs, farm services, and processing and sale operations.

While the Budget referred to speeding up various infrastructure projects such as Dedicated Freight Corridors, Bharatmala Pariyojana (roads and highways project), and the Sagar Mala project (to reduce logistics cost for trade and domestic operations by setting up and modernising ports), much of this will depend on the government’s ability to raise funds and rope in private sector for such projects. If implemented properly, infrastructure projects will benefit the companies in the logistics sector by reducing costs, increasing transit speed, and lowering turnaround times. However, this benefit is not going to accrue overnight. Further, the logistics sector has to compete with other government objectives in terms of access to funding. For example, should the priority of the government be bullet trains or dedicated freight corridors and faster freight movement?

Focusing on the issue of farmers and their market connectivity, gaps in handling capacity and logsitcs in the agri-supply chain, as have been identifed by the government’s own reports such as the NCCD’s report, have not be addressed directly in the Budget. For example, there is no clear strategy for increasing the capacity and units of of pack houses, reefer vehicles, and cold storages or for encouraging private sector to invest in modern warehouses and refrigerated vehicles by incentivising them through subsidies or tax reduction. There is also no clarity on developing last-mile delivery connectivity which is crucial for the final delivery of goods to the consumers. The Budget has proposals for creating food parks and industrial corridors, but most of the exisitng ones are underutilised, one of the reaons for which is their remote locations leading to lack of connectivity to markets and farmers. Logistics infrastructure is unequally spread across states, and remote and hilly regions which have potential to move to high value organic produce face more logistics infrastructure gaps than other parts of the country. The logistics needs for different regions have to be identified, and funds should be allocated accordingly. Even after India signed the World Trade Organization’s (WTO) Trade Facilitation Agreement, agri-exporters have pointed out that there are hardly any fast track clearances for perishable goods (except in Mumbai), and for a single product, clearances are required from multiple departments within the Ministry of Commerce and Industry such as Agricultural & Processed Food Products Export Development Authority (AEPDA) and Export Inspection Council for peanut exports, and APEDA and Spices Board India for organic spice export, which causes delays. Exports would have sped up if there was one agency is to monitor tracebility and quality. APEDA is the ideal agency to do so. Further, with the requirement of WTO’s Agreement on Subsidies and Countervailing Measures, India can no longer give export susbsides under the Foreign Trade Policy. Since the WTO is yet to develop a discipline on subsidies in services, it is prudent for the country to subsidise the logistics costs for exporters, especially since logistics cost in India accounts for 14 per cent of the GDP compared to the global average of 11.7 per cent.

To help the farmers to link to their markets and develop agriculture as a business, the gaps in logistics sector have to be addressed, and at the same time, marketing channels have to be developed. The newly created logsitcs division of the Minsitry of Commerce and Industry may look into this issue.

Dr. Arpita Mukherjee is a Professor at ICRIER. She has several years of experience in policy-oriented research, working closely with the government in India and policymakers in the EU, US, ASEAN and in East Asian countries. Her research is a key contributor to India’s negotiating strategies in the WTO and bilateral agreements. She has authored chapters in joint study group reports set up by Indian government and has led research teams contributing to India’s domestic policy reforms in areas such as logistics, retail, special economic zones and mega food parks. Dr Mukherjee has a Ph.D. in Economics from the University of Portsmouth, UK. She has published widely and presented her research in various international and national forums.

Ms. Avantika Kapoor is a Research Assistant at ICRIER. Her areas of interest include international trade and policy, and food safety policies. She has worked on survey-based studies for Indian government departments, including the Directorate General of Commercial Intelligence and Statistics under the Ministry of Commerce and Industry, and for international governments such as the European Commission. Avantika has completed her M.Sc. in Economics from the University of Warwick, UK, and a B.A. (Hons) in Economics from University of Delhi.